The Money of Movies

By
Jeff B. Cohen, Esq.
| Posted April 12, 2009, 8:12 p.m.

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Friday the 13th grosses $43.6 million in its opening weekend, the most ever for a slasher pic! Gran Torino grosses $29 million to win the weekend and become Clint Eastwood's biggest nationwide opening of all time! What does this really mean? How does a film make money? It's important to understand thoroughly the economics of your profession, so let's take a look. Films are commonly distributed in the following ways: theatrical release, nontheatrical release, DVD and videocassette, Internet, video on demand, pay television, and free television. In addition, income is often generated from merchandise related to the movie and the release of a soundtrack CD.

Theatrical Release

The box office number we see in the news is usually the gross revenue from tickets sold to the film in the United States. Only a percentage of that is paid to the studio releasing it. The total the studio receives is called the theatrical film rental, and it's subject to negotiation and takes myriad factors into account, including the buzz surrounding the movie. A major studio is usually paid between 40 and 45 percent of the box office. For a hit, that rate may climb as high as 55 percent. An independent distributor may receive as little as 33 percent. And the percentage usually decreases the longer the film plays in theatres.

What about all the revenue from those $10 bags of popcorn and $8 gummy bears? One hundred percent of that goes to the theatres. Sorry, Warner Bros. 1994 was the first year that foreign theatrical revenue was actually greater than domestic theatrical revenue. These days it's not uncommon for a film to generate more money overseas than in the U.S. Studios utilize foreign subsidiaries or subdistributors to distribute their films in other countries, and because of this middleman, the studio often receives a smaller percentage of the gross from foreign theatrical distribution than from domestic.

Nontheatrical Release

Nontheatrical film rental comes from the distribution of a film to smaller venues such as airlines, cruise ships, and military bases. These venues don't pay very much money, but the studios still cash the checks.

DVD, Videocassette, and Internet

Then you have an enormous but shrinking source of revenue from DVD and videocassette sales. It's been said half-jokingly that a film's theatrical release is just an expensive commercial for the DVD. If a DVD costs the consumer $10 at Wal-Mart, the studio will probably receive around $6.

DVDs are extra-profitable for the studios because of an infamous deal struck between 20th Century Fox and a long-forgotten company called Magnetic Video back in the 1970s. As a result, the studios pay residuals on only 20 percent of the money they receive from DVDs instead of 100 percent. Not surprisingly, this 20 percent figure has been a tremendous source of strife between the guilds and studios over the years. With the stunning decline of DVD revenue, the film industry is desperately searching for something to fill the chasm. It hopes that high-definition Blu-ray DVDs will be a replacement, but as yet consumer demand is underwhelming. Revenue from Internet and new-media distribution is growing, but not nearly fast enough to replace the gold mine that was DVDs. The economics of exploiting a film via new media are a work in progress.

What about DVD rentals? This is not a major source of profit for the studios, because companies like Netflix and Blockbuster only have to buy copies of a film once. Then they rent them out as many times as they can without having to pay the studio additional money.

Television

Income from television distribution comes from a number of sources, domestic and foreign, including pay-per-view, premium channels, basic cable and satellite, and free television. The amount of money a film generates from these sources is partly a function of its box office success and can vary wildly.

Merchandise and Soundtrack

Certain films lend themselves to merchandising and soundtrack sales. Star Wars action figures would do much better than, say, Terms of Endearment plush toys. I'm also fairly certain the High School Musical CD sold more copies than the soundtrack to Ishtar. Merchandising and music deals usually involve a guaranteed payment to the studio and a royalty payment based on sales of the merchandise or soundtrack.

Now when you read the weekend box office report, you'll know that the studio probably sees only around 50 percent of that cash -- if it's lucky. And you can bet someone somewhere is trying to figure out how to get a piece of that $10 popcorn.